Defence Equipment Plan still unaffordable, says NAO

The Ministry of Defence’s Equipment Plan remains unaffordable and is not sustainable if the Department wants to deliver longer-term value for money, according to today’s report from the National Audit Office (NAO).

The Department’s forecast costs for the Plan exceed its budget by £7.0 billion in the next ten years. It forecasts £193.3 billion on equipment and support costs, against a £186.4 billion budget, including a £6.2 billion contingency. These costs could vary, and in a worst case scenario, should all the identified risks occur, this gap could grow to £14.8 billion.

The NAO report has found that the Department’s approach to forecasting costs is more realistic than in previous years. It has a fuller assessment of nuclear project costs, has used more accurate US dollar exchange rates, and now includes costs for the Type 31e frigates which were omitted from the previous year’s Plan. However, costs are still potentially understated by £3 billion.

Given 84% of the expected overspend in the Plan occurs over the next four years, decisions need to be made now, rather than relying on longer-term cuts or efficiencies.

In choosing to start the year with a forecast overspend, the Department needs to make in-year programme decisions to bring the Plan back into balance, a practice that the introduction of the Equipment Plan was meant to prevent.

Given the MDP has not yet completed, the Department has focused on making just the first year of its 10-year Plan affordable, but has had to find an additional £1.3 billion from the start of the year for 2018-19.

Delaying decisions, while the MDP is ongoing, increases the risk of the Department not achieving long-term affordability and value for money. This increases the likelihood of the Department returning to the past poor practices. For example, to make savings the Department delayed work to replace Astute-class submarines and introduce remotely controlled aircraft (Protector). This may have a longer-term impacts on production and costs.

Financial constraints in other areas of the Department are also limiting its ability to redirect other budgets to address shortfalls in the Plan, with overspend in the Plan having the potential to exacerbate these wider financial pressures. For example, the NAO has previously reported a £8.5 billion gap in the Department’s estate budget and pressures on its spending on staff.

The NAO recommends that the Department decides which programmes to defer, de-scope or delete as soon as possible.

Stephen Morgan MP, said:

“This report supplies some limited reassurance that the MoD is working to properly calculate the funding gap in the equipment plan. But the fact remains that cost estimates are still potentially out by billions of pounds and the black hole in the defence budget is vast. The scale of the issue is coming into focus, but not going away; defence is woefully underfunded.

It goes to highlight that the money announced for defence in the budget was really just a drop in the ocean.

We need a sustainable financial footing for our armed forces and whilst the accounting improvements at the MoD are welcome, this conversation starts at the Treasury.”

Amyas Morse, head of the National Audit Office, said:

“The Equipment Plan 2018-28 shows that the Ministry of Defence has a clearer understanding of the affordability issues that it faces, but it equally shows how urgently it needs to get on and tackle them.”